The global stock market rally continued in the second quarter although gains were muted compared to the previous two quarters. Investors’ hopes for tax cuts, infrastructure spending and extensive deregulation under the Trump administration gradually faded but the market still went up.

The most impressive investment story in 2017 has to be the incredible rise in the price of Bitcoin, the virtual currency. Bitcoin nearly tripled in value, although its price swings up or down 20% on some days. The currency at this point is far too volatile to find a place in the traditional financial system.

Domestic Equity Markets

The S&P 500 increased by 2.6% in the second quarter to finish the first half of the year up 8.2%. The Dow Jones Industrial Average added 3.3% to gain 8.0% for six months. The NASDAQ Composite Index, on the other hand, fueled by tremendous returns in the large-cap tech stocks, has increased by 14.1% so far in 2017, although the NASDAQ peaked in early June and fell 2.87% by the end of the quarter.

The main takeaway from U.S. markets so far this year is that growth stocks have trounced value stocks, thanks to soaring performances from large constituents like Apple, Amazon, and Facebook. Large-cap growth stocks have gained 14% thus far in 2017 versus 4.7% for large-cap value stocks. Small-cap value stocks are barely in the black with an increase of just 0.5%. This reverses last year’s performance when value stocks did better.

The only stock sectors in the red for the first half were energy and telecommunications. Energy fell 12.6% as OPEC’s production quotas failed to shrink the oversupply of oil as U.S. production increased. The largest telecommunications companies, AT&T and Verizon, are facing intense price competition from smaller competitors like Sprint and T Mobile.

International Markets

International stocks posted strong gains in the first half, with the MSCI EAFE index of developed international stocks up by 11.8%. However, a good share of the gains enjoyed by foreign stocks has come from appreciation in foreign currencies relative to the U.S. dollar. European stocks were buoyed by the convincing victory of centrist Emmanuel Macron over populist Marine LePen in the French elections, while several terrorist attacks in London and elsewhere did not derail markets.

Emerging market stocks did even better, with the MSCI Emerging Markets index gaining 17.2%. Emerging markets are relying less and less on oil exports for economic growth, as the price of oil fell 14% in the quarter. In the past, emerging market equities have closely tracked the price of oil.

All of the world’s top 20 economies are growing so far this year, a broadening of growth not seen since 2010. Growth in developed economies is boosting exports from emerging market countries.

Bond Markets

The U.S. 10-Year Note, which began the quarter at 2.39%, fell to a low of 2.13% on June 14th as U.S. core inflation fell to 1.7% in May. On June 15th, the Federal Reserve announced its third quarter-point rate increase in six months, but the 10-Year showed little immediate reaction. Then, during the last week of the quarter, Fed Chair Janet Yellen expressed concern about the high level of asset prices and European Central Bank (ECB) President Mario Draghi stated that the ECB could be nearing the end of its quantitative easing. Central bank officials in England and Canada also discussed the possibility of interest rate increases. Government bond yields around the world surged, with the U.S. 10-Year ending June at 2.30%. That surge has continued into the third quarter with a move back to 2.39%.

Commentators were quick to declare an end to the 35-year bond bull market, with a columnist in Barron’s, the weekly financial magazine, stating that the comments by central bankers were “game changer[s].” However, the end of the bond bull market has been declared many times before, and, despite recent increases, the absolute level of bond yields remains very low.

The Economy

The U.S. unemployment rate fell to 4.3% in May, a 16-year low, and job openings in April were the highest ever. On the other hand, growth in U.S. gross domestic product (GDP) was just 1.4% in the first quarter and is tracking toward a gain of 2% or slightly higher for the second quarter. Automobile sales appear to have peaked in late 2016 and housing starts have fallen recently.

At eight years, the current U.S. economic expansion is the third longest in history. (The longest was the ten-year expansion from 1991-2001.) Ironically, the slow growth the U.S. is currently experiencing could extend this expansion by not allowing excesses to build up.

Conclusion

After an eight-year bull market, equity valuations are quite high and future returns could be modest. In its 2017 Economic and Market Outlook, Vanguard places the highest probability of nominal (not adjusted for inflation) returns for global equities in the 5-8% range.

In addition, geopolitical uncertainty is high, as shown by the recent testing of an intercontinental ballistic missile (ICBM) by North Korea. As always, we will closely monitor all developments affecting your investments and keep you advised.